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CNET News.com: SEC pores over pro forma

Jun 21, 2001, 17:00 (30 Talkback[s])
(Other stories by Margaret Kane)

CNET reports that the US Securities and Exchange Commission is investigating companies for deception thanks to their use of pro forma financial results. As an example of the dramatic difference between pro forma and the results showing using the Generally Accepted Accounting Principals (GAAP) standard, this article points at Red Hat, which either had a $600,000 profit or a net loss of $27.6 million this past quarter... the company's first profitable quarter ever, according to the press releases. Please note, so there's no ambiguity at all, that this article does not say that Red Hat's under investigation.

"There are other reasons behind the popularity of pro forma numbers. For one, companies want to stay in line with what their competitors are doing.

"If you're a new entrant in an industry where competitors are valued on a cash basis, you'll do it too," said John Corcoran, the Internet and digital new media analyst at CIBC World Markets. "You don't want to be the only one putting out a 50 cent per-share net loss, while your rivals are reporting 8 cent pro forma profit."

The same holds true for the analysts. "There are 45 people who follow AOL. You can't have 10 looking at one thing and 10 looking at something else," Corcoran said."

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